Who should we believe?

There is value in tracking economic trends. They tell us about the direction of the economy, which in turn informs us about the health and mindset of consumers (accounting for about two-thirds of U.S. economic activity) and businesses (about 15%).

However, economic trends provide only limited insight in projecting stock returns, in part because the stock market flows through the economy like a river — affected by the environment, yet moving independently. We have all seen stocks rise during recessions and fall when economic growth accelerates.

At the moment, the economy and the stock market tell different stories.

 Inflation picked up in March, with the Consumer Price Index up 3.3% from a year ago, versus 2.4% in the first two months of the year. Annualized growth in gross domestic product was a lower-than-expected 2.0% in the March quarter. According to the Philadelphia Fed’s survey of professional forecasters, GDP should grow 2.1% in the June quarter, followed by 2.3% in the September quarter and 2.0% in the December quarter, implying no acceleration. U.S. nonfarm payrolls expanded by 260,000, down from 911,000 in the same period a year earlier — and at least 2 million in each of the three previous periods.

The S&P 500 Index has gained 16% since late March. The Dow Theory is bullish, though the Industrials have been unable to seal the deal on a reconfirmation by corroborating the Transports’ new highs.